There are all kinds of ways to divide/categorize the American public: there’s the urban/rural divide, the differences between Republicans and Democrats, people who are college educated versus those who are not…One distinction that is rarely highlighted but incredibly important doesn’t even have a descriptive term–it’s the difference between people who recognize and respect evidence and those who don’t.
Think of it as the difference between people who accept the Enlightenment emphasis on empirical reality and those who are “faith-based.” Being faith-based, at least as I am using the term, doesn’t necessarily mean “religious.” It means preferring an ideological commitment–something taken on faith– to demonstrable reality, and a number of people–many of them highly educated–fall into that category.
The judges who award the Nobel Prize just delivered a message to those faith-based folks, and that message was that real-world evidence matters more than ideological or theological preferences, no matter how sincerely or deeply held.
The Nobel Prize in Economics went to three American scholars. One of those was David Card of the University of California at Berkeley, who will receive half the prize.
Card was recognized in part for his groundbreaking work in the early 1990s with the late Princeton economist Alan Krueger, which challenged conventional wisdom about minimum wages.
Economists had long assumed that there was a tradeoff between higher wages and jobs. If the minimum wage went up, it was thought, some workers would get higher pay but others would be laid off.
But when Card and Krueger looked at the actual effect of higher wages on fast food workers, they found no significant drop in employment.
In other words, Card and Krueger explored what actually happened when adjacent jurisdictions imposed different minimum wage laws. They compared fast food restaurants in New Jersey, which raised its minimum wage, to restaurants in neighboring Pennsylvania, which did not.
Three economists were awarded the Nobel Prize on Monday for showing that precise — and surprising — answers to some of society’s most pressing questions can be gleaned from experiments rooted in real life.
David Card was recognized by the Royal Swedish Academy of Sciences for groundbreaking work on minimum wages, immigration and education. He showed, using a natural experiment — where researchers study situations as they unfold in the real world — that increasing the minimum wage does not necessarily lead to fewer jobs.
The announcement of the award made special mention of the importance of “experiments rooted in real life.” Until very recently, much research–including economic research–has been heavily theoretical and mathematical: this equation or formula predicts that taking such-and-such action will bring about thus-and-so result.
Card said his work was mostly about “trying to get more scientific tie-in and evidence-based analysis in economics.”
“Most old fashioned economists are very theoretical, but these days, a large fraction of economics is really very nuts-and-bolts, looking at subjects like education or health, or at the effects of immigration or the effects of wage policies,” he said.
The Nobel committee noted the importance of that emphasis on real-world evidence.
“Card’s studies of core questions for society and Angrist and Imbens’ methodological contributions have shown that natural experiments are a rich source of knowledge. Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society,” Peter Fredriksson, chair of the Economic Sciences Prize Committee, said in a statement.
I’ve previously admitted that–much like those “conventional” economists– I had accepted the belief that a higher minimum wage would lead to job losses. It seemed so logical. I later realized that the “logic” required a seldom-noted caveat: all other things being equal. And in the real world, all other things are rarely equal.
What led to that realization was real-world evidence that became available after studies done by Card and others persuaded some jurisdictions to raise their minimum wages and report the results.
There’s nothing wrong with theory, but it’s a framework for empirical exploration, not a substitute. In the end, real world evidence is what matters.
What is surprising, and unmentioned by Ms. Kennedy, is that so many lawyers believe things on “faith” (as she defines it). Prime examples are Guiliani and Powell who pursued cases without evidence and are suffering for it, as they should. Lawyers who appear in courtrooms learn not to make statements unsupported by evidence. What a better world we would have if all public were held to that standard in making public policy. The world would even be better if elected officials suffered defeat for creating policies and making statements that are unhinged from reality.
What is surprising, and unmentioned by Ms. Kennedy, is that so many lawyers believe things on “faith” (as she defines it). Prime examples are Guiliani and Powell who pursued cases without evidence and are suffering for it, as they should. Lawyers who appear in courtrooms learn not to make statements unsupported by evidence. What a better world we would have if all public officials were held to that standard in making public policy and lost their jobs when creating policies and making statements that are unhinged from reality.
But, if we repeat a lie over and over again, we can manifest it as truth. So, the rules and norms are easily broken and if my targeted audience expects me to reinforce their ideas and beliefs, all the better.
What baffles me about economists is their use of free-market variables as a given. Also, if their theories were all that grand, why do they all use such opaque schemes to deliver their approaches to the people? It’s a world that operates in the shadows and can’t be trusted.
Those publishing their findings in the real world leave out the all-important externalities or the fact the markets are not comprised of equal sides.
For instance, ranchers raising cattle are getting squeezed on prices even though the cost of beef is going up. The ranchers were getting ticked and did their homework and determined that the consolidation of meatpacking plants into four main powerhouses allowed them to fix prices (which is exactly what was happening). So the ranchers used to take their cattle to markets where their stock would be auctioned.
Somehow, despite all the economists in the United States academia and within the FTC and USDA (government), the meatpacking plants could consolidate all their power into four primary providers. Oligarchy.
The ranchers and oligarchy had a battle, and the ranchers lost their first-round to economists/politicians/oligarchs.
As with all these industries, if we had a fully functioning economy within our society, whereas there are checks and balances to prevent power from becoming concentrated, how did all these industries become uncompetitive?
The press and the government failed because they were both corrupted by the oligarchy.
Speaking of evidence and fact-based decision making, I’ve yet to find any study that empirically validates the theory of quantitative easing. You know, the one that results in the little guy getting .38% on his/her CD’s while banks charge 17%+ on credit cards. Anyone?
Richardallen, the first night of my first class in an MBA program, we were advised that the business of business is to make money, the more the better. Banks certainly don’t have to charge 17% on credit cards, since they borrow at rates that are lower than the much lower rates they pay on your CDs. They charge that much because they can.
Peggy Hannon .
Amen to your comments .
Spot on .
Most theoretical economics studies are binary – if this, then that – rather than global – where does this fit in with everything else, and what, other than that, is important. Minimum wage is a perfect example. Increasing wages should decrease jobs, but only if the increased wages have no other effect. On the other hand, if increased wages increase job satisfaction and therefore productivity, or if increase wages means increased buying power where the money is spent at the same businesses, the binary is only a very small part of the equation.
If the minimum wage were raised from $7.25 an hour to $9 or $10 an hour, it would likely not cause any job losses. That’s because the current marketplace for labor is well above that. Many unskilled, entry level jobs are paying $12 to $15 an hour, often with benefits, bonuses, and scheduled pay increases. But if the minimum wage were raised to $15 an hour, or higher would it cause some job losses? Some…and it would also cause employers to cut back employees’ hours, stop offering bonuses, benfits, and regular pay increases, etc.
To those who don’t think raising the minimum wage can cause job losses, I ask them to consider the specifics of the raise. So your position is that raising it $10 won’t cause job losses. How about $15? How about $25? How about $30 an hour? Or $35? Even the strongest advocate of a raising the minimum wage will eventually concede that raising it to some level will cost jobs. So to say minimum wage increases do not cost jobs is an oversimplification. It depends on how high it’s being raised to.
The current job market has rendered irrelevant the $7.25 minimum wage. That’s a very good thing. There is a reason why economists do not support artificial floors on employees wages. The market place for labor works better.
“Real World Evidence” often gets termed as qualitative data, not the more commonly used quantitative (not real world as it may have a narrow frame and often does not consider or discuss insightful variable which are termed “outliers “….perhaps precursors to future trends). So the “real world” may, and often is, stereotyped as the data reporters deem it most beneficial to their hypothesis and ending conclusion. Only numbers may not always tell the true truth nor the story details.
Thank you, Sheila, this is so in alignment with a Peter Attia posting of today.
Mathematics is linear. Individuals and societies are not linear. It sounds like David Card combined sociology with economics.
Economics is definitely not my area of expertise. I have seen how the economics of a free market have affected the cost of health care. The free market has resulted in the closure of rural hospitals after they have been bought out by the franchises of the health industry i.e. IU, St. Vincent’s, St Francis, CHN. This has further increased the number of people who do not have easy access to health care. This in turn increases the cost because those people do not seek medical attention until their illness has progressed to an intolerable and/or potentially fatal level.
I wish an economist would do research on how a competent public health infrastructure with competent preventative services can reduce the costs of health care.
The other argument people use about increasing the minimum wage is that it will lead to increased inflation. I would like to know if any economists have researched that argument to see if it is true.
It’s interesting that two areas of life that are high risk if humanity is wrong, science and law, use similar processes to be most certain of being right. The biggest difference between the two is that in scientific research the jury is both qualified and involved in similar research and is informal and in law, the jury consists of peers of the defendant and the process is very structured. What is absolutely the same is evidence as the only thing that speaks directly to the ultimate decision. Of course in law, the law is the standard being judged against and in scientific research, the standard is the reality of the universe and everything in it.
I read about these minimum wage studies several years ago under Obama. They were stark examples of how what sounds like a logical argument is often flat out untrue. Since the original studies in the 90’s the results have been duplicated in other places.
What amazes me is the how according to any right-wing pundit, it was Biden that was “wrecking the labor market” with the extra $300 Federal unemployment benefit. There were some states that either never took the money, or ended it early, and still had the same tight labor pool as the states whose “economies were being wrecked”. Yet the lie persisted that lazy bums were not going to work because they could make more with unemployment than actually getting a job. It sound very plausible, but the reality is that there are many other reason people are not jumping into the labor market, especially for low end crappy jobs.
When the jobs report came out a week or two ago, it looked pretty dismal with only a few hundred thousand jobs added to the economy. A few days later additional data came out that some 4 Million people quit their jobs in the same period! It turns out hiring was on a rip roaring tear to even add jobs in a market like that.
You also have to keep in mind that these low wage minimum wage jobs account for only about 2% of the workforce. So you can have huge wage increases in the low end and have only a microscopic effect on the entire economy.
I think what we are seeing in the labor market right now is a huge reshuffling as people were given/forced time to evaluate what was valuable and plan for a better or different future.
Let’s just simplify the argument. If you give money to people who need money, they spend it on everyday things, like food, clothing, housing, transportation. In other words, that money goes back into the economy. It also gets turned over frequently, so the money you spend to buy food is spent by the grocer to pay his staff and replace inventory, and spent again to pay the staff at the producers of the good and to produce more goods. It’s kind of like a “Do Loop” for all those old Fortran programmers out there.
If you give more money to people who don’t need it, they will buy more stock, That money doesn’t get turned over as much as that spent on consumer goods, unless you buy stock in companies that care about things other than their bottom lines. How many of those are out there? I don’t know, but I think it’s safe to say, not enough.
Equilibrium occurs when supply = demand. What this study does is the application of supply-side economics to minimum wage jobs. Like most great discoveries, this one has its foundation is simple principles.
Evidence works great for understanding the past.
Predicting the future?
Not so much…
Great essay and comments! I studied economics in the early 70’s and it was well-into the period where its practitioners were wrapping its assumptions and theories in higher level mathematics to help give it legitimacy as more of a natural science. (Robin, mathematics is not linear – it can represent problems in any number of dimensions from 1 to infinity).
But even in these so-described natural experiments there are still many other factors at play that influence outcomes. Economists use advanced statistical models to “control” for these other factors. It’s still anything but perfect but it makes the discipline, theories and experiments, less imperfect and we call that progress.
Richard Allen, I guess the theory behind QE is nothing that can’t be explained by how economics treats the money supply. The federal government (through The Fed Reserve) purchases $Billions in treasury bills and mortgages on the open market and they pay for it by paying the holders (banks, governments, agencies, insurance companies, pensions and other corps) a digital form of “printed money”. All this extra cash then sits in reserves and sloshes around looking for ways to be used. Because its supply is so vast, lenders can only get meager returns – .1% to around 4.5%. At least 2/3rds of the 17% banks charge on unpaid balances covers the enormous cost of unpaid debt by cardholders. It’s all a scam of course – people who default on their credit card balances should not HAVE credit cards….but no. Todd Smeken’s favorite oligopolists (after meat processors) in the US banking industry ensure this mother lode is here to stay.
Paul K. Ogden is exactly right…there is a price point where wages for various skills and job will start killing off those jobs as capitalists find other ways to make their product or provide their service, or they decide to deploy their capital in some other endeavor. But we can’t simply blame it all on minimum wage that is too low. The underlying cause of of low wages is the massive oversupply of people with few marketable skills to qualify for higher wage jobs. If that supply of labor were to diminish significantly then wages paid to low-skill workers would likely rise at some point. So we have to attack that from the supply side through better education and tech-training where there are so many jobs begging for applicants.
I have always been a fan of the enlightenment, facts and reason. I’m also a deist, but it’s not an article of faith. It just seems LESS irrational to me than the idea that all of what we know as existence “just happened”, or “just exists”.
Have a great week!
Some points here –
As Paul points out, the “natural experiment” only shows the results with the wage points that existed. Paul then assumes the results at other wage levels without evidence. He also notes SOME increases in entry salaries, without questioning whether a $12/hour wage was instituted to forestall the push for a $15/hr wage, and wouldn’t have happened otherwise. There is more to delineate and more to question. Evidence.
Robert Jamison – The “natural” experiment did not rely upon the simple principles of supply side economics. The supply-siders were the ones arguing that increased minimum wages ALWAYS lead to job losses.
Richardallen – We once had usury laws, because excess interest was considered sinful. They were repealed with the switch that Peggy noted from “reasonable profits” to unbridled greed being the “moral” thing to do (for the shareholders, of course).
When explaining reality, you have to consider variables, boundaries, scope, and the openness of the system.
Anti-vaxxers act as if each body was a closed system. “If I get COVID-19, it is my choice”, but it isn’t. That person’s choice could kill someone.
To an extent, people who don’t take care of their health, even for non-contagious conditions, put a burden on everyone else. Of course, it often is the case that an excessive burden was first placed on them, but that is another issue.
Looking a pollution, corporate “cost-benefit analysis” usually ignores many factors, like the cost of cleaning up their mess, or that their sulfur emission in the Midwest caused acid rain in the East.
I purpose that we call these people who don’t respect evidence as “truthiists”, after Stephen Colbert’s Truthiness. Then again, maybe not the best, but it is how they think.
Gerald Stinson – thank you for the book suggestion the other day. It sounds interesting. I will have to read it.
Amen (pun intended) to Sheila and to Robert Ducomb.
While the market sometimes responds to data and reality, the psychology of markets can veer badly off base and cause politicians and business leaders to go awry. Business leaders also have their own biases which defy data as well as humanity. It took a couple decades of pressure before male-dominated businesses and health insurance companies would pay for birth control pills, even though contraception was much less expensive than maternity care, hospitalization and delivery, and the coverage costs for larger families.
The short-sightedness of male stereotypes, business leaders, and too many in Congress again are encouraging congressional hesicenance to provide family tax cuts for child care. Businesses cry they can’t find enough workers, but parents can’t return to work until and unless they have access to reliable and affordable child care. A minimum wage job makes no financial sense for a worker who has to pay more than half their wages for child care. Why aren’t businesses screaming to free up tens of thousands of workers needed with a tax cut for child care? Why aren’t they opening job-site child care centers of their own? Why aren’t they connecting these dots?
Many low-wage employers have raised minimum wages up to and including $15 an hour but still can’t fill job openings. Poor working conditions, lack of advancement opportunities, and lack of fringe benefits combine to make minimum wage jobs far less attractive than jobs offering all three in addition to better pay. It’s no wonder many employees are quitting jobs like that and shopping for better options. More power to them. It’s past time to improve long-stagnant pay and benefits.